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Saturday, October 15, 2011

A few years ago, the government started KiwiBank. I may have my facts crossed up here but below is my understanding of how it was set up and how it operates. My information is from bits and pieces in the press and on the radio. And it is brilliant. No, I'm not being my usual sarcastic self. It really is brilliant.

The government provided the seed capital for the bank. I have heard that this was $200m. The bank is therefore an SOE (State owned enterprise). The difference between this SOE and others is that the government doesn't insist on a dividend. KiwiBank is allowed to put her earnings back into the business. This is the first brilliant move. KiwiBank can grow organically by plowing her profits back into increased capitalization.

KiwiBank was set up to operate from existing post shops. If you have gone into banks in many countries you will see that they are the most opulent of any business you are likely to visit. Marble counter tops, paneling of rare and expensive wood etc. Where do you think the money came from. You guessed it. Higher charges to borrowers, lower interest to depositors and so forth. Not in KiwiBank. The shops are already there, the workers already in place and earning their crust, primarily from the post shop. In addition, once you have set up your bank account with KiwiBank, almost everything you have to do can be done online. Once again, very low overheads.

I'm not sure if this is still so but initially, KiwiBank didn't have any other shareholders. This is the third brilliant aspect of KiwiBank. If you have shareholders, you have to give dividends. This a stream of money leaving the bank that could better be used to decrease interest for borrowers and/or increase returns for depositors and/or increase the capitalization of the bank.

The fourth brilliance of KiwiBank is that it is wholly owned by Kiwis. To the best of my knowledge, all our other banks have a majority Australian ownership. Ausi shareholders expect a dividend, and this is a stream of money pouring out of the country. A recent item on Nat Radio suggested that this revenue stream is around $4b. None of this is from KiwiBank.

All is not clear sailing, however. There is talk (perhaps it has already happened) of selling shares in KiwiBank in order to increase its capitalization. In other words, borrowing money. It would be far better to grow KiwiBank organically. As profits are made, they increase the capitalization of the bank and it can loan more money*. I would even go so far as to say that as it grows, KiwiBank should pay back the government seed money. This way it becomes completely independent. It becomes a bank that can serve the needs of New Zealand and not rich shareholders and bosses with expectations of completely unjustified bonuses. Am I worried about an uneven playing field. Not a bit of it. I want our KiwiBank to have an 'unfair' advantage.

*Banks must have a certain legislated level of liquidity. In other words, they must have X amount of money in their vaults in order to be allowed to loan Y.